Most people would associate a board of directors with larger companies where the influence and leadership of an independent board is critical to good governance and the success of the company. Although a start-up or small business can also reap significant benefits, many owner/founders still wonder why they need (and shy away from) the advice and guidance that an in-person board can provide. Instead, they resort to sometimes dubious online accelerator programs.
Take your foot off the accelerator pedal
Ask any startup founder what they look for in an accelerator program and many will say they want:
Advice from entrepreneurs who have “been there and done that”; or
Introducing potential investors, including prominent venture capitalists.
You can also receive both from a carefully selected board of directors.
Those who signed up with Texas-based Newchip, a virtual accelerator provider, didn’t get what they expected when the company filed for Chapter 7 bankruptcy in May 2023, owing $4.8 million to creditors US dollars left behind. Ironically, Newchip itself was something that may have benefited from a strong and independent board. Newchip founder Andrew Ryan admitted that the company had grown far too quickly and that he had never been CEO of such a large company.
A board creates added value
Part of the appeal of running your own business is the independence, freedom from process, and the ability to pursue your own unique vision. However, there is no doubt that startups with professional boards tend to be more resilient and attractive to investors and talent. Diverse and independent board members can add value to a start-up company by bringing skills and experience that the founder may lack and giving them access to business contacts and networking opportunities that are so crucial for a young company.
There is also no need for the founder to give up control of his company. For many entrepreneurs and smaller businesses, an advisory board may be better than a full board. An advisory board has no legal responsibility, but is only there to advise and give feedback. Fully commissioned board members also control and direct strategy, so you can do the best work possible and don’t have to act as your “boss.”
In particular, the role of non-executive directors (who have the same legal responsibilities as executive directors) is to ensure good corporate governance, provide oversight, expertise and knowledge, and constructively challenge management when necessary. They are not involved in the day-to-day operations of the company and are not employees of the company, but can still provide clarity on strategy and help distinguish between long-term and short-term goals.
Attract investments
A board’s independent advice can also be important in attracting investment by giving investors greater confidence that important decisions are made solely in the interests of the company and free from conflicts of interest. If the investment in your company comes from venture capitalists (VCs), it is probably even more important to have a board that ensures strong oversight. Unfortunately, instead of monitoring their startup portfolio to reduce risk, some VCs, after deploying capital, use their role in corporate governance to persuade founders to pursue high-risk, rapid growth strategies to maximize returns all the dangers associated with young companies. An independent board can balance the need for continuous innovation with sustainable, accelerated growth.
Attract and retain talent
A board can also be helpful in attracting and retaining talent. Hiring independent board members to interview candidates not only takes the pressure off the owner/founder, but is also very attractive to potential new hires because it can give them a more complete picture of the company’s vision. Once hired, a board can also provide oversight to ensure you have the right HR systems and policies in place and help retain that talent by looking at compensation and incentive structures and training.
Choose the right board for you
As a start-up, you should make sure to recruit board members with different professional experience and different perspectives in order to embed diversity of thought that increases creativity and innovation. Many larger companies have entrenched cultures that do not embrace diversity. In 2021, a report (The Hidden Truth: Diversity & Inclusion in the FTSE All-Share) found that less than half of companies met the target of 33% women on boards and only 3% of board members in the FTSE All-Share ex350 were “directors of color” (male or female). Start-ups can use the recruitment of board members with different perspectives to embed diversity of thought from the start and gain a competitive advantage.
The team of start-up lawyers at Motion Paradox can provide you with legal advice and corporate governance guidance, and help you structure a board that meets your needs to ensure your business is more resilient, scalable and profitable.
